Can You Put a Life Insurance Policy on Anyone?

Life insurance is a contractual agreement where an insurer promises to pay a designated sum of money, known as a death benefit, to a named beneficiary upon the death of an insured person. Policyholders typically pay regular premiums in exchange for this promise. This financial instrument provides security and support to loved ones or entities facing financial hardship after the insured’s passing. Specific requirements determine whether a policy can be placed on an individual.

Insurable Interest Requirement

A fundamental principle in life insurance is the concept of “insurable interest,” which dictates that the person purchasing the policy must have a legitimate financial or emotional stake in the continued life of the insured individual. This interest ensures the policyholder would suffer a genuine loss, not gain, from the insured’s death. Insurable interest prevents speculative insurance, which could incentivize harm to the insured. Without this demonstrated interest, an insurance policy is considered void.

Insurable interest must exist at the time the life insurance policy is issued. The policy purchaser must prove their financial or emotional connection to the insured when the policy is issued. This requirement is important for the policy’s validity, even if the relationship changes later. For example, if a divorce occurs after a policy is issued, the ex-spouse might still receive the death benefit if named as beneficiary and insurable interest existed at inception.

Various relationships satisfy the insurable interest requirement. Spouses and children have an inherent insurable interest due to financial and emotional dependence. Parents have an insurable interest in their children, especially if financially dependent or to cover future expenses like college debt. Adult children may have an insurable interest in aging parents, especially to cover end-of-life costs like funeral expenses.

Insurable interest also exists in business relationships. Business partners insure each other, as a partner’s death could impact business operations and financial stability. Employers may also have an insurable interest in key employees whose skills or contributions are important to company success. Such policies, called “key person insurance,” protect the business from financial fallout.

Creditor-debtor relationships also establish insurable interest. A creditor who has loaned money to an individual has an insurable interest in that person’s life, as the death of the debtor could jeopardize the repayment of the loan. In these cases, coverage is limited to the outstanding debt. Documentation such as loan agreements or financial contracts can serve as proof of this financial connection during the application process.

Consent and Application Process

Obtaining consent from the insured is fundamental to the life insurance application. The insured must sign the application, approving the policy’s issuance. This consent ensures individuals agree to having a policy placed on them, safeguarding against unauthorized coverage. Without consent, a policy can be deemed invalid or face challenges upon a claim.

Consent is important when the policy owner is not the insured. For instance, if a parent insures an adult child, or a business partner insures another partner, the insured’s signature on the application is mandatory. This signature confirms agreement to medical examinations and personal information collection for underwriting. The process emphasizes transparency and the insured’s right to control who can obtain coverage on their life.

Special considerations apply when the insured is a minor or an incapacitated adult. For minors, parental or legal guardian consent is required, as a minor cannot legally enter into a contract. The parent or guardian signs on behalf of the child. This ensures appropriate legal oversight for the policy.

For incapacitated adults, consent must be provided by a legally appointed guardian, conservator, or an individual with a valid power of attorney for financial and legal decisions. This framework protects vulnerable individuals from policies taken out without their understanding or against their best interests. Legal documentation proving guardianship or power of attorney must be presented to the insurer during application.

Policy Ownership and Beneficiary Designation

Understanding the roles of the policy owner, the insured, and the beneficiary is important in life insurance. The policy owner controls the life insurance contract. This person holds rights, including modifying coverage, taking out policy loans, or surrendering the policy for its cash value. The owner is also responsible for paying the premiums to keep the policy in force.

The insured is the person whose life is covered by the policy, and whose death triggers the payout of the death benefit. While the policy owner and the insured are often the same person, they can be different. For example, a parent might own a policy on their child, or a business might own a policy on a key employee. In these instances, the owner must have an insurable interest in the insured at the time the policy is purchased.

The beneficiary is the individual or entity designated by the policy owner to receive the death benefit upon the insured’s passing. A policy can have one or multiple beneficiaries, and they can be family members, trusts, charities, or other organizations. The policy owner selects the primary beneficiary, who is first in line to receive the proceeds, and may also name contingent beneficiaries as backups.

A distinction is the beneficiary does not need insurable interest in the insured at death. Once a policy is validly issued with insurable interest and consent, the owner can name anyone as a beneficiary. Even if the relationship between the owner and beneficiary changes, the beneficiary’s right to the death benefit remains, provided the policy is active and the designation current.